Macro Man

This Is How You Get Got

noreply@blogger.com (Nemo Incognito) — Mon, 28 May 2012 08:27:00 +0000

You're in the Bushveld digging up rocks
Got, this is how you get got
LSE listed and offshore borrowings too
Got, this is how you get got
Trying to hustle in Africa without breaching FCPA
Got, this is how you get got
Some guy called Paulson said "I like your stock a lot"
Got, this is how you get got

TMM can't help but think of the lyrics of Mos Def's "Got" warning of the dangers of flaunting wealth when thinking about precious metal miners. GDX, the largest ETF covering gold miners has flown high and far since the end of 2008 and it supercharged much of the more inflationista funds' returns. Palladium is the standout but all of them ripped and ripped hard through mid 2011. If you were buying gold and particularly gold equities till you were almost blacking out you could do no wrong.

Recently however, this has changed as can be seen below. The first chart is gold versus GDX.

The second is a bunch of platinum miners and platinum and palladium. As you can see, for both the equities are not just doing really badly, they are underperforming physical in a big way.

Not that physical is looking healthy in gold - TMM's brokers indicate that given the stuttering out and decline in ETF ounces for gold seen below in white is a big part of the drop in physical (orange). Were it not for central bank dip buying things would likely be much worse.

So, aside from TMM's view that you've heard before - you know - that this recovery in the US is sustainable enough to not justify merciless slotting of USD as an investment strategy anymore - TMM thought it would be good to give you a couple of choice quotes from Eastern Platinum, a South African Platinum miner that they released in May last year.

On Friday 6^th May, mine vehicles were driven by employees through the security gate to the Zandfontein Mine causing damage to mine property. Employees then embarked on unprotected industrial action. Mine services at both Zandfontein and Maroelabult underground mines were also damaged, and for safety reasons, the management at CRM instructed the mines to be vacated. Approximately 180 workers then proceeded to unlawfully occupy the mines. Mine management advised employees to cease this illegal action, and simultaneously, a court interdict against NUM and its members was granted that instructed NUM and the employees involved to cease the action and vacate the mine. The workers involved made several demands to management, as well as threats of damage to mine property and underground infrastructure if management did not comply with these demands. To safely resolve this situation, to prevent it from escalating, and to safeguard the overall integrity of mine installations, management had numerous meetings with NUM and instructed them to ensure that their members vacated the mine and ceased their unprotected strike action. An offer was made by mine management to resolve the situation but this was rejected by NUM and/or the employees involved who refused to vacate the mine and made yet further demands of management that were rejected. As these workers refused to vacate the mine, the offer made by management was then withdrawn.
Following the failure to resolve this illegal action by some of their members, NUM invited the Congress of South African Trade Union (“Cosatu”) to assist in negotiations with the instigators of the illegal industrial action. Certain statements were made by the Cosatu and NUM representatives to their members in order to encourage them to vacate the mine. There was no agreement in place between CRM and NUM/Cosatu at this time. The workers involved in the illegal action subsequently vacated the mine.

Stuff happens, but stuff happens more in emerging market countries that have bad institutions and whose labor unions are the political support base of the ruling party as the NUM is with the ANC. TMM would like to say that anyone who thought doing business in South Africa was going to be easy or allow one to earn the excess return of precious metals over the contents of South African CPI or any other wages proxy failed in a big way to understand this country. If you want to own a mine you don't just need high metals prices, you need them to rise faster than your costs. TMM think that mining in South Africa and having your profits increase very quickly is a bit like Mos Def's description of flashing all of your rocks in Brooklyn. Dangerous, and not a long run equilibrium.

TMM are still negative on South Africa where most of the gold and PGM output comes from, miners in bad jurisdictions and when we want to short USD we find something cheap, not something shiny. All great parties have to end and TMM thinks it time to call this one whatever the gold bugs say.

A Spanish Farce

noreply@blogger.com (Polemic) — Mon, 28 May 2012 08:00:00 +0000

[Outside a Spanish restaurant]

Spanish Government [patting pockets] - "Hang on... Has anyone seen my credit rating? I can't seem to find it"

Santander - "Uh oh, where did you last have it?".

Spanish Gov. - "I'm sure I had it a moment ago. I just used it to issue. You remember? Really expensive place. Cost a fortune!"

Santander - "Ah yes, thanks for picking up that one. I owe you. Hmmm.. You sure you didn't leave it on the table"

Spanish Gov - "No I was really careful. You can't trust anyone these days. My friend Portugal left his rating in open view, next thing broken glass and rating gone!"

[Bankia blushes]

Santander - "Bankia , Have YOU seen it anywhere?"

Bankia [sheepishly] "No??".

Santander - "Sure?".

Bankia - "Yup!".

Santander - "What's that bulge in your pocket?".

Bankia - "Errr,.. Nothing?".

Santander - "You aren't thinking of nicking the Spanish Gov's credit rating and using it to issue against, whilst the market isn't looking are you ?

Bankia - "Nope!"

Santander - "Come here! Show me what's in your pocket! Hmmm what's this then?"

Bankia - "Nonononono! you don't understand! I'm just BORROWING it! Just until I can repo back through the ECB some cheap cash! No harm done, no one will notice! Look I owe some bad people about E19bio at least. Pleeease don't tell! I'm going to give it back I promise!".

Santander - "Look if you give it back now, we won't tell anyone and it doesn't look as though the Gov has noticed what you are up to. Just put it back on the table before anyone sees".

[Pauses]

Santander - "Hang on, HOW much did you say you can get with that rating?".

Bankia - "Well it should do me for at least 19bio, but I reckon it's good for a lot more before it wears out".

Santander - "Hmm. Look, if I don't tell the Gov and if we do promise to put it back, which we will right? Then perhaps if you do me for 20bil as well then I won't tell if you won't. No harm done and all that. Times aren't exactly that easy for me either".

Bankia - "Yes exactly! No harm done see? We stay within the ECB rules, the blind accountants don't see what's happening (as usual) and we just give the Gov his rating back once we've err, "borrowed" it for a bit. They won't even notice!"

Santander - "Better not let the markets know though"

[off stage - NEE NAW NEE NAW NEE NAW NEE NAW]

Bankia -- "Shit, it's the markets! Arrgh they are on to us, look at the yields! And they've got the Bubahounds with them. Those bastards will sniff out the faintest whiff of monetary financing!! LEG IT!!!!

[Exit Spanish banks from the stage of global finance]

Inspector Weidmann - "Evening All! Now what's been going on here then? Hmmm. A European Sovereign distraught having lost its credit rating? The smell of piss-take in the air? Only witnesses are accountants, ECB and a crowd of policy makers, but they all swear they saw nothing? Hmmmmm ..All VERY familiar .. Sargeant? We have here another case of "Printing Money". Round up the usual suspects!"

Inglorious Europeans

noreply@blogger.com (Polemic) — Thu, 24 May 2012 10:07:00 +0000

The post we planned on today has had to be delayed. But we leave you with a question - Are the current European negotiations going the same way as the bar scene from Inglorious Basterds?

You are welcome to add your own film clip vs current event in the comments.

Back tomorrow.

Wasp in a Bottle.

noreply@blogger.com (Polemic) — Wed, 23 May 2012 12:32:00 +0000

Yesterday TMM were trying to write a post and just gave up after rewriting a couple of paragraphs a few times as each sentence suddenly seemed to deserve a whole post. But reducing down the boiling mass of poorly linked thoughts we ended up centring around the idea that until we get the Greek elections out of the way the European function could suddenly move from the melt mode to sideways trading as the "sell" part of May turns to "go away". The bounce yesterday seemed to support that but the new levels of panic earlier today challenged it, but by no means negated it. Equity markets have rapidly given up yesterday's gains but haven't broken new lows, periphery European bonds are steady and it really seems to be the mainly the FX market that is shouting and screaming. No change there then.

With that in mind we are going to stick to our "not really going anywhere for the next 2 weeks" view, so despite spikes of buzzy noise we expect the wasp to be trapped in the bottle. This led us to think that perhaps we should be using this morning's spikes in short term vol to sell it. This train of thought led on- Sell 2 week vol but perhaps buy 1 month for after the election event? For direction as well and in what? Is this for a stand alone trade or a hedge ? Looking at the Greek hedge (garden centre jokes aside) we feel the ultimate explosion in Euro would surely have to be in Eur/chf where, unless the SNB want to become the vomitorium of Europe, they would have to let the floor go at least temporarily. So we either get fancy and sell 2 week eur/chf puts and buy 1 month or we just don't bother and sell eur/chf cash. We then we got distracted and didn't do anything.

Without any new news, the debate is becoming religious over Europe and we do consciously try to avoid religious issues. This is also why we won't be talking anymore about Facebook. Elsewhere it does look as though we are coming to the end of the current supply cycle and the BRICS are losing their mortar as Brazil goes nuts, Russia's without love, speculators bone China and India curries no buyers. None of which is good for the commodity story but we will be posting on all of that tomorrow.

Finally TMM are suggesting that any thoughts of a "Grexit" should be accompanied by those of a "Gerxit". How about the rest of Europe default on everything they owe Germany, kick them out of the Euro and then print like crazy. That's what you do when you cant work out which of two scrapping schoolboys started it - send them BOTH out of the room.

---
Stop press- A friend of TMM has just sent in this. We are unsure as to whether it is his own work or an original from the estate of the, very sadly, recently passed away Mr Robin Gibb. Either way, we are very proud to present Robin Van Bee Gee doing the EU-

Well you can tell
By the way I use my fork
It's EU dinner time
No time to talk
Disputes loud , a massive storm
Problems kicked around
Since the Euro was born

They'll say it's all right, it's ok
We'll have more dinner in late May
Bury our heads in the sand
And all come up with diferent plans

(chorus)
Whether you're a Frenchman
Or whether you're a German
The Euro's barely alive, barely alive
Feel the city breakin
And everybody shakin'
The Euro's barely alive, barely alive
Ba, ba, ba, ba, barely alive, barely alive
Ba, ba, ba, ba, barely alive

Bunds don't go low, they just go high
And if they don't do either, I start to cry
Long wings of dollars, in the blues
Buying Facebook Puts, I just can't lose

They'll say it's all right, it's ok
We'll have more dinner in late May
Bury our heads in the sand
And all come up with diferent plans

(chorus)
Whether you're a Frenchman
Or whether you're a German
The Euro's barely alive, barely alive
Feel the city breakin
And everybody shakin'
The Euro's barely alive, barely alive
Ba, ba, ba, ba, barely alive, barely alive
Ba, ba, ba, ba, barely alive

Struwwelpeter - Moral Tales for Modern Europe

noreply@blogger.com (Polemic) — Sat, 19 May 2012 11:03:00 +0000

"Just look at him! there he stands,
With his nasty hair and hands.
See! his nails are never cut;
they are are grim'd as black as soot;
And the sloven , I declare,
Never once comb'd his hair
Any thing to me is sweeter
Than to see Shock-headed Peter "

Team Macro Man, when they were little macro children, were given a book called "Struwwelpeter" which was written in the late 1800s by the German Psychiatrist Heinrich Hoffmann as a set of short stories for children showing the shockingly disastrous consequences of misbehaviour. To some, the book is an anachronistic psychological nightmare to be confined to the Politically Correct incinerator but TMM have always delighted in it, leaving them rounded with fond memories of moral tales with endings that didn't pussy foot around.

This morning found us once again reading the book to the squeamish delight (note not horror) of our own offspring and as we did so it became abundantly clear that the book should have been made essential reading for all Eurocrats and Greek politicians. The stark Germanic cultural attitude towards transgression from the rules shines through and is as valid today as it was when the book was written.

Rather than us rewriting each story in its modern context we would suggest you fire up THIS copy in another window and read along as you consider the following -

Harriet and the Matches - Obviously the Greeks playing with borrowing and spending, as they have seen their elders and betters do, but ending with Greece as a pile of ashes.

Augustus who wouldn't have any soup - Greece turning down the bailouts handed to them by Europe and they end up slowly starving to death.

Fidgety Philip - Phillip is so obviously Greek Politics pulling down the dining table of Europe as the Core tell him to behave.

Robert - Investors buying periphery sovereign debt thinking they are protected by CDS and getting carried away never to be seen again?

Johnny Head in the Air - The Eurostriches of European policy reaction with 2011 being the first fall and 2012 the big fall into the canal (hopefully to be fished out by the IMF) all because they couldn't see and react to what was obviously in front of them.

Cruel Fredrick - Frederick is Germany, forcing austerity on periphery countries only to be bitten by them and confined to bed as the periphery then eat his dinner.

The Man that went out Shooting . - This story involves a hunter who, whilst dozing, finds the hare he was after has stolen his gun and his spectacles. The hare then wrecks havoc upon the Hunter and his home, eventually killing him. Hunter - Germany, hare - periphery, specs and gun - policy?

Finally "Struwwelpeter" himself - Europe.

There are other stories in his book that we will leave you to interpret yourself (the comments column is open for alternatives) but, Heinrich Hoffmann, we thank you. You were either the Nostradamus of European politics or have beautifully illustrated how the current European turmoil boils down to basic childish behaviours that the rest of us that were taught from a very early age are just plain wrong.

You know it's May when..

noreply@blogger.com (Polemic) — Thu, 17 May 2012 12:53:00 +0000

You know it's May when-

1) Greece is doing its best to detract holiday makers and you wonder if you should forgo the deposit on your Greek Holiday.
2) David Cameron is crowing about how to run Europe.
3) Your inbox is full of crowing statements from FX banks about how well they've done in a Euromoney Survey.
4) You live in London and are diagnosed with rickets through lack of sunlight.
5) There is a deafening silence from the Eurostriches. It normally takes until August for them to schedule a meeting for late September.
6) FX spot traders rummage in the drawer for last year's "what basis swaps are" notes.
7) Analysts just Tippex out and change the year on their research notes, confident that no one ever read them the first time round.
8) "Sell in May" statistical proofs hit your desk.
9) Your grandmother sends you old cuttings on how to grow your own veg and build an air-raid shelter.
10) EGDF replaces DGDF (see glossary)
11) No one cares about economic data.
12) The BBC question whether Van Rompuy deserves his last year's bonus.
13) Your P+L looks like the deck of a Japanese whaling ship.
14) Price Is News with "hasn't been here since [insert last time]" headlines dominating.
15) Despite the end of the world, someone manages to IPO a grillion $s worth of non-controlling shares in a company that everyone uses for free.
16) High yield pipeline dries up, liquidity dries up, the fund's credit trader starts punting index / working on his putt / is not in the office.
17) Zerohedge and Hotcopper light up with "why is GDX going down" oriented posts with the comments explaining some conspiracy.
18) Football competitions start to be cited as pivotal market driving events.
19) France and Germany pretend to be best mates.
20) Team Macro Man start leafing through the "situations vacant" column of the local parish magazine.

Poll Results and Ramblings.

noreply@blogger.com (Polemic) — Wed, 16 May 2012 13:10:00 +0000

Thank you for the many votes from various quarters and first we apologise for a lack of graphs and charts. We have some of the results but are struggling with uploading at the moment but will try to update later tonight ( if you haven't already done your own). So here are the words, if no pictures.

Though of course it is still a low sample size to draw many conclusions from, by eyeballing our charts the underlying trend was that most of you think the market is perceiving the date of an exit to be one notch earlier than you are. Trends by segment had the "buy side" putting their own views and market expectations at much about the same, which would make sense as they effectively ARE the market. The "e's and d's" are most skewed to things happening much later than where they think the market is pricing. To be honest we expected the "non-financials" to be more "sooner than market" rather than the other way around. Oh, and perhaps the most important voter, the one proclaiming to be a Greek Politician, says 2013. But then how much do we trust a Greek Politician.

We also half expected prices to start moving in to "earlier" as time wore on in the survey as the noise levels in the real world grew deafening. But not really so. You are a principled lot who stick to your views! We really will have to try and dig out some good survey widgets that not only do simple polls or surveys but can also let you all play with the results. If so we'd start running regular surveys.

Right .. onwards and downwards. TMM are coping with a severe "Edward the Seconding" (see Glossary) at the hands of a markets that are.. well.. as a friend descibed them - "The financial markets are like a strapless bra. Half the people are wondering what's holding it up whereas the other half are waiting for it to drop so that they can grab the opportunity with both hands".

TMM have been thinking and wondering. With the market effectively pessimistic of any workable solution being found TMM think its time to think "outside the blx". and come up with some may be not so mad ideas of their own:-

"Rotten borough" short term fix - Offer each voting Greek say 5,000 Euros to vote in "the right way"? How many voters are there? A guess of 8 mil? So E40 billion cost? Worried about the morals? Well they can always say no! Surely a bargain compared to the trillions that would be wiped off global markets and debt foreclosures on a complete mess up? Yeah yeah .. we know, it doesn't fix the long term problems etc.

Longer Term - In the UK the BBC was moved up to Manchester from the expensive costs of real estate and living in London, to the economic benefit of their new home. This was after the government had already moved state run administration for similar reasons to the likes of Cumbernauld and the economically suffering North East. Now TMM propose that the EU do the same and move all EU parliamentary, administrative. legal and regulatory functions from their homes in Brussels, Strasbourg, Frankfurt and wherever else they are squirreled away in "core countries" to Greece. On top of the benefits to Greece of the huge cash injection of all that EC admin budget, placing the ECB and EU Parliament in Athens and the EIB and European Court in Thessaloniki might just focus a few minds. We could even rename the Acropolis the Troikopolis. They can also keep the move of Parliament between two centres, how about Athens to Rhodes to give the Greek Ferry services a boost? On top of it all, just as Gordon Brown knew, creating more jobs paid for by the state overlord makes that overlord a lot more likely to be supported in the polls. We see Greece's benefits to be huge and the cost savings on current process would also be significant.

But joking aside, it is still fascinating that the true cause of the current failure of Europe is the half-cock nature of its unity. Much as some are more equal than others, some areas are more "unified" than others. Unified monetary system, unified trade, open borders, BUT and the big BUT - There is still no real unity and freedom through mobility of workforces and until Greeks exodus to Germany to freely take German jobs for less pay the rot will continue. Perhaps we need cultural union before monetary union (oddly perhaps via the English language).

We are still convinced that printing money is the solution that needs to be arrived at as fast as possible. What's the problem with that? The currency moves lower - well that's helpful. You can use the newly printed money to fill in the bank debt holes and sovereign funding issues. Inflation? On imported goods via fx moves yes, but the export and global competitiveness function is of greater importance. So what about that imported inflation feeding through to wages? Looking at the UK and Switzerland that is not a problem. In fact the UK's management of the crisis so far is, despite non-financial sector sniping, is remarkably robust and though we have been huge critics of Mervyn King in the past, maybe its time we put him in charge of the ECB.

The problem is that policy response is, by its very name, rarely policy pre-empt and is always reactionary with a lag and as we have seen in Europe so often - A lag that just makes things worse.

Greek Exit. What do YOU think?

noreply@blogger.com (Polemic) — Tue, 15 May 2012 11:12:00 +0000

In TMM's eyes today is crucial as to whether the European markets nose dive in flames or skim the treetops and head back into clear air (for at least another week). The general feeling around us is that the best that a possible outcome could be is a "Capt C Sullenberger" miraculous yet painless ditch. Few seem to think that clear blue skies are possible again. With little new news apart form the European data today it still all seems to rest on opinions of Greece's existence in the EZ. With opinion rife we thought it would be interesting to see if we could pin down some structure to what our readership think towards when/if Greece will exit and how they perceive the expectations of the rest of the market. More interestingly, we hope to see if we can pick up some biases against backgrounds.

1) When do YOU expect it to be announced that Greece is to leave the Euro (either by Greece or the EU).

a) In May
b) June - July
c) Aug - Dec
d) 2013
e) So far forward it's irrelevant to today's markets.

2) When do you think THE MARKET expect it will be announced that Greece is to leave the Euro (either by Greece or the EU).

a) In May
b) June - July
c) Aug - Dec
d) 2013
e) So far forward it's irrelevant to today's markets.

3) Are you

a) "Buy Side" - invest other peoples money
b) "Sell side" - including bank traders + sales
c) Analyst/advisor without own positions.
d) A professional private investor.
e) Have a non-financial day job.
f) In the media.
g) A European policy maker
h) A Greek politician

Hopefully the results will be interesting to all, the more respondents the better so please feel free to circulate.

PS. If anyone can mail us the html code for adding cunning vote buttons that will show votes 1 and 2 by answer 3 then it would be very gratefully received!

The 19 stages of a Eurogeddon Monday.

noreply@blogger.com (Polemic) — Mon, 14 May 2012 10:27:00 +0000

OK, Greece. Are they really really clever or just so completely and utterly stupid they shouldn't be trusted with a pair of blunt scissors, even the rounded end ones? We still hang on to the hope that there isn't a coalition government and the population are forced back to the ballot box with a clear instruction that what they are voting for is euro membership or not.

As for today we feel déjà vu and would suggest that the market is really looking for some sort of policy response or else they will just keep drilling prices. The Eurostriches are once again silent on coordinated policy, but this time rather than it due to their heads being buried in the sand, they are too busy with their own internal fights

However,despite the new levels of euro panic TMM think they have seen this sort of day before and can sum it up as "The 19 stages of a Eurogeddon Monday". All times are London based.

1) Expect resolution on a European issue over the weekend.

2) On Sunday it becomes apparent there is no resolution.

3) Twitterati and blogosphere go into overdrive

4) Asia opens and sells hard.

5) Media quote twitterati and the Asian price falls.

6) 08.00 Europe, now whipped up, opens and sells hard.

7) 08.30 Media and commentaries quote the resultant price moves including lots of " haven't seen this price since the last time"

8) 09.00 More Selling.

9) 09.30 Having sold, the market takes a pause to notice that there hasn't actually been any new news.

10) 10.00 All talk is to the downside with more gloom recycling but no further price response.

11) 11.15 US wakes up to a deluge of commentary saying SELL and to seeing prices lower.

12) 12.00 US sells and prices fall again

13) 12.30 Models join in and sell.

14) 13.00 Europe relieved to see US commenters also saying the markets are a sell.

15) 14.30 US Equity markets open and fall hard to the "toldjaso" relief of all those who have sold in the last 24hrs.

16) 15.00 US notice that there is actually no new news and some shorts from Sunday Asia open are covered.

17) 15.15 Momentum picks up to the upside accompanied by "just a short term bounce, sell the rally" comments.

18) 16.00 Small positive comment from a Eurocrat/Greek and markets recover further into European close.

19) Tuesday 10am - "Well it IS going to happen one day" - short term positions closed or moved to long term book as it morphs into a "Turnaround Tuesday".

Team Macro Man are really hoping the Eurocrats or Greece can do a bit of a "Manchester City" with a final seconds redemption, but it does feel today as though a lot of the crowd have already left the stadium.

How the Banks See Each Other

noreply@blogger.com (Polemic) — Sat, 12 May 2012 11:44:00 +0000

This week has been dominated by news about banks. We have had JPM's trading slip up, Credit Agricole's collapse in profits because of Greece, headlining have been the Spanish banks and overseeing all of this have been the local central banks. Team Macro Man think it useful to examine the interrelationships between all of the antagonists, so we give you our quick guide as to "How the Banks See Each Other"

Friday Questions

noreply@blogger.com (Polemic) — Fri, 11 May 2012 13:00:00 +0000

"The world was darkling. The very air seemed brown, and all things about were black and grey and shadowless; there was a great stillness. No shape of cloud could be seen unless it were far away westward, where the furthest groping fingers of the great gloom still crawled onwards and a little light leaked through them. Overhead there hung a heavy roof, sombre and featureless, and light seemed rather to be failing than growing" J.R.R. Tolkien

Despite the sun finally appearing over London today (actually as we write it's gone again) the financial scene does feel very Tolkienesque especially in Europe where, if they were to reshoot the film, we would suggest the following cast :

The Ring - the Euro
Sauron - Weidmann
Saruman - Scheuble
Mordor - Germany
Mount Doom - Bundesbank
The Nazgul - Bond Vigilantes
Gollum - Greece
Gandalf - Draghi
Frodo - European Economy
Bilbo Baggins - Trichet
Gimli - Merkle
Pippin - Hollande

Elsewhere, we really couldn't decide which picture of an exploding whale to paste in so instead pick your favourite here.

Once again we wheel out our favourite trading aphorism "If you want a hedge, go to a garden centre". $2bio is really not a lot to a bank of their size and though the world's media, Volker advocates and all of JPM's competition are expressing a level of schadenfreude that is verging on Milibandesque, unless there is a systemic threat to the system - which we really don't see despite the disasternista's "but what ifs" - this is localised issue and not worthy of shellacking the whole US market and certainly not global stocks.

There is one upside to the event - the resurgence of the word "Egregious" According to the OED, "Egregious" is defined as "towering above the flock", "Prominent, projecting", and yet it can mean "remarkable" in a good sense or "remarkable" in a bad sense. We look forward to this word rocketing up the management bullshit charts as it basically means "wow that's big" but with no admission of failure.

TMM have to rush off now, but leave you with some questions for the weekend -

Can the catch all "unwinding inflation hedges" be used to describe recent market moves, especially in commodities and gold?

Gold. 1480 or 1680 first? We have learned not to mention this relic and have stayed clear of its debate for the last 18 months having found the subject more touchy than Great Aunt Maud's crack habit. So lets just ask - 1480 or 1680 first?

Are Greek politics modelled on Monty Python's "Life of Brian"? We've already had the "what did the ~~Romans~~ Europeans do for us?" scene and have now moved on to the confusing list of popular people's parties.

What yield would you have to be offered to eagerly buy Spanish 10yr basef on current information? (Expecting more than "any price lower than market bid" thank you)

Is "Sum of the Parts" analysis more relevant now as this isn't a global crisis but a set of local issues that can be arb'ed on the global stage. Eg.TEF?

Are we mad to think the best fx trade here is to buy aud/jpy?

Will Spanish banks morph into a single EIB/EFSF backed people's popular post office?

Should TMM walk away from the 20% deposit they paid on their Greek summer holiday? Yes, Greece again. The family like it.

Perfect Storm: Part 2

noreply@blogger.com (cpmppi) — Wed, 09 May 2012 13:16:00 +0000

It's happening again. A global feel of "risk off" which is actually the sum of separate regional issues rather than a single global world shaker.

Europe now - Greece Back, Spain constant and a socialist whiff in the air. Socialist? Or perhaps just more bipolar. While right wing behaviour is easily tagged as "selfish", socialist behaviour is seldom considered such. However, TMM would wager a friendly fiver that the current wave of European socialism is about sharing someone else's wealth rather than their own. With Germany the "sharing" target of most European socialist's eyes, it is hard to see Germany following suit and moving left rather than right. At least not before the SPD win next year's election...

And who has just reappeared? Yes, that Gollum of Europe, Greece, and just like his Lord of the Rings role, this weak creature is back to twist and manipulate, follow and haunt the once strong and wise of Europe on their quest to save the Euro.

Amongst the Grexit paranoia and panic that has begun to build, TMM offer a few thoughts:

1) From the IMF/EU/ECB/German point of view, the direct cost of refusing to compromise, resulting in Syriza's reneging on the bailout agreement and defaulting is exceptionally high:

a) 70% of Greece's debt is now made up of official loans already disbursed: EUR 140bn.
b) The ECB owns EUR 40bn of Greek bonds.
c) Greek banks currently repo EUR 140bn with the ECB.

A Greek debt moratorium would thus impose exceptionally large losses on international creditors directly. To the above, the indirect costs would also be material as there is not a sufficiently large firewall to prevent the spread of contagion, nor do the Bundeathstar and EU policymakers more broadly truly appreciate the potential for contagion to accelerate beyond their ability to contain it. The magnitude of a such a sufficient policy response is just not even close to getting on the radar yet.

But even ignoring contagion, the direct costs are enough to blow up the ECB and very probably block any further IMF lending to European countries. Balancing against German arrogance/moral hazard concerns, it is not obvious that the Troika would refuse to compromise at all (despite the widely-held view that the Germans have had enough and will refuse), especially given the IMF reportedly were pushing at the last review for the fiscal consolidation to be spread out over an additional year. It is also worth noting that the cost to Europe (and especially Germany) directly would increase materially were the IMF's war chest not available for Spain/Italy.

2) The risk of Syriza ending up as the largest party - and so getting a bonus 50 parliamentary seats - is material. Assuming that they are able to attract additional support from the Left-leaning parties only (TMM don't think it is too much of a stretch to argue that the right-leaning voters are unlikely to vote for a hard Left party), and that New Democracy manage to hold onto their current level of support then on TMM's calculations a 2.2% swing from non-Syriza left leaning parties to Syriza would make them the largest party, with the additional 50 seats. That is not a massive hurdle, especially given that the momentum is now with them.

However, there has also been some dismay in Greek political and media circles at the performance of extremist parties. If Tsipras is going to be able to pick up more votes, he is going to have to seem a bit more mainstream or even more hard-left, given that the Communist party to the left of him are for leaving the EUR (he is against) and have refused to join him, while PASOK to the right of him are pro-EUR but obviously also in favour of the Memorandum. It's not easy to see whether he will pick up enough extra votes or not, but certainly very possible.

One thing that has struck TMM, in response to the German/EU statements on austerity commitment is the view that you do your homework or you leave the Eurozone. It is no coincidence that both Venizelos and Samaras have begun to try and discredit Tsipras' policy of defaulting, reversing austerity and structural reform but remaining in the EUR as a false choice - you cannot have only the good bit (EUR) without the bad bit (austerity). To reject the Memorandum is to leave the Euro.

If PASOK/ND can paint the likely upcoming election as a referendum on the Euro (to which 70%+ of Greek voters wish to keep), then the risk of an extremist government should fall, and a national unity coalition seems more likely. TMM wonder, perhaps, whether Papandreou's gambit last autumn should not have been so heavily crushed by the EU powers, for that was to be marketed as a referendum on the Euro. The Germans reap what they sow...

In light of the points in 1), should PASOK/ND manage to form a unity government, the Troika may provide a token compromise, either by relaxing a little bit or using Hollande's suggestion of a beefed-up EIB to invest in Greek infrastructure or something along those lines. TMM tend to think the latter is more likely.

3) Should Syriza manage to become the largest party, then despite Tsipras' desire to keep the Euro but default on everything, TMM reckon that a Euro exit would likely become inevitable - not out of choice, but as an "accident" arising from the following course of events:

Troika refuse to back down on austerity.
Default on ECB/Troika causes a lot of name calling & anger in Europe and elsewhere.
Bank runs in Greece accelerate further.
The ECB refuses to accept defaulted debt as collateral, cutting off the Greek banking system.
The inability to access the ECB window means that de facto Greece is no longer part of the monetary union, it merely uses the Euro (like Montenegro).
The resulting EUR140bn funding shortfall forces a sudden stop in the Current Account
Imports collapse as payments cannot be made due to bondholder court judgements freezing payments.
Food/fuel shortages, power goes off... riots move to a far more severe intensity. Perhaps the Army seize control, TMM do not know... but it seems reasonable to assume that during the political chaos a Euro exit would seem inevitable.

TMM's personal view is that a compromise of sorts will eventually be made because the costs in this gigantic game of chicken are astronomical on both sides, with some form of unity government formed that has a small bone thrown to them. It is paramount that ND/PASOK portray a new election as a referendum on Euro membership. And we should monitor the press over the coming weeks to check this. If the discourse in the media does not take this form by a week or so before the election, then TMM fear that Syriza will be able to consolidate its position and pick up the extra votes needed to become the largest party.

What to do? In the case of Syriza becoming the largest party, TMM will look buy a ticket to the theatre, buying downside in S&Ps and shorts in EM. TMM do not think trying to trade European assets directly is the right thing to do here given a lot is priced into them, and there are many uncertainties around capital controls and other legal aspects.

Should the discourse move towards Euro membership, then TMM do think it's worth trying to fade some of this Grexit paranoia. In the meantime, given that Equity Long/Short guys do not seem particularly exposed to risk (and large net-longs from this investor base have typically been seen into the larger risk aversion events since 2009)- see the Russell performance yesterday), increasing open interest in Eminis into the sell-off (argues either or both of gross book expansion beta hedging and new shorting) and general excitement on the IBs about range breaks that in the short term it looks a bit overdone to us.

Kerwang Markets

noreply@blogger.com (Polemic) — Fri, 04 May 2012 12:26:00 +0000

A few years back TMM did their motorbike test with 3 good friends. Not so much because any of us had real aspirations to brave the London roads on a death machine but more along the male testosterone ability/one upmanship lines and having another licence to display next to our diving / parachuting / marksmanship / racing driver / kick-box instructor / ski guide / golf pro / astronaut cards (if only). Doing the accelerated "know nothing" to "full licence" course required a basic knowledge of bikes and so we didn't really get off to the best of starts when our instructor's first instruction, once we were mounted on our 50cc starter bikes, was to "just let in the clutch and ride 10 feet forward". One of us did what looked like an "emergency accelerate", careering off into a fence. Our relationship with our 22 stone bigot of instructor never really recovered.
There were various fond memories, including when he pulled us over to the side of the road "Right lads ..take a look around .. As a road user what is the main hazard you would be most wary of" TMM Reply - "The four blokes standing in the road in "trainee motorcyclist" vests looking around aimlessly?"

But the highlight, if you will excuse a very rambly start, was when Mr Unpleasant asked us "Do you know why the Harley is called the potato"? No? "Because the noise it makes is "potato potato potato potato"". To which TMM replied, bearing in mind the motorbike the instructor rode, "Ahh! that will explain why the BMW1200 is called the "Kerwang"". He just looked confused as his instructees broke down in mirth.

And THAT, dear reader, leads us back to these markets (we hope you have worked out the kerwang reference by now) because TMM are feeling like a bunch of kerwangs, Either that or everyone else is. But invoking the old dinner party adage "If you cant work out who the wanker is, it's probably you" it must be us. April and now the short start to May have evidenced this. We just need to look at our P+Ls and the carnage inflicted upon them.

So what is making us kerwangs?

Our views on Europe? Because we cant see what everyone else can in Europe? They are in recession Ok, but we are not about to lose the Euro. But we are being undermined by good old fashioned non-binary economics with the slew of rubbish PMIs. Rubbish but still not a complete disaster. At the aggregate level eurozone composite PMI is still only implying about -0.3% Q/Q for Eurozone GDP which is obviously not great, but it's not enough to drag the rest of the world down. TMM think you'd need to see -0.5 to -0.6% QoQ for it to start having an effect. The key thing is not to be paralysed by the shock value of Spanish or Italian PMIs on a low 40-handle. These are not surveys with a particularly long history they likely have the same X-12 2008/9 crisis echo problem with their seasonality and as they only go back to mid-2005 there are not enough crisis-free points to actually figure out a seasonal adjustment factor that is "clean" (like the NAPM have done for ISM). Finally, it is worth pointing out that the "50-level" does not correspond with 0% GDP even if that is what some lazy interpreters would like us to believe.

Our views on commodities? We note the recent dump in materials, largely due to an emerging consensus that QE or not, with supply situations improving in base metals and bulks the best days of the sector have come and gone. TMM think this is about right and while gas heavy diversified companies BHP and XOM may pay nice dividends and have upside, the days of making notes punting small cap ASX names is largely over. We are short coal, copper and silver. QE doesn't matter for anything (except gold) when fundamentals are this strong for the sell side. Perhaps iota has already started. - The UK FTSE underperformance today despite peripheral Europe gains is nearly all due to the basic materials sector.

Our views on Equities? Super cycle - bond and commodity markets on the wane and equities to lift off as the next "whowuddathoughtit" parking bay for all that cash. Earnings this season at 8% against expectations of 3%. An underlying support from either QE from someone, or growth that will preclude the need for QE. A new bias to go for stimulus in Europe. Thie isn't 2011 its more like 2009. The real money sector paranoid about downside risks and already hedged. That's it basically.

Perhaps we are just kerwangs for even being in this business. TMM have seriously started to consider how they can get public sector jobs. Cleaning road bollards for a south London council seems infinitely more attractive than dealing with half of the kerwangs in this industry.

We wish you a happy long weekend if you are lucky enough to be having one.

Behavioural Model.

noreply@blogger.com (Polemic) — Wed, 02 May 2012 11:21:00 +0000

What a difference a day makes. "Sell Aud? Australia? Where's that? We are back to selling Europe again".

TMM's Bloomberg IB chat bias-o-meter would have us believe that we are about to have a Euro panic similar to that of 10 days ago. If that is any indication of the size and commitment of short term positions then really the price moves so far aren't that impressive. We will not get sucked in (though we may get spat out of existing positions).

But it doesn't matter if we are right or wrong in our method, prices change because people decide levels at which they are willing to trade. So no matter how much we believe in our methodology, no matter how much it can mathemematically be proved correct, no matter how much our theory, or even what we thought was everyone else's theory, tells us we are right; if everyone else is reacting for different reasons then our ultimate reward for rightness (profit on price movements) will remain elusive. Which is a long winded way of saying the market will remain irrational longer than we remain solvent. This is of course why it is imperative to understand what drives other people to make decisions as much as understanding our own.

We often see the markets as a massive poker table around which sit thousands of players, all with their own different reasons to play and ways of playing. Understand all of them enough to pre-empt their actions and you can profit greatly. But that's nigh on impossible so we tend to group the types. We have in the back of our minds ideas for a piece on all the different types we have encountered over the years but that is for another day.

Instead today we have knocked up a behavioural model of how the markets work, very much from our own perspective. It's remarkable in its familiarity. No prizes for guessing which one we are.

T'was a Dark and Stormy Night

noreply@blogger.com (Polemic) — Tue, 01 May 2012 13:14:00 +0000

We've been playing Battleships with the RBA - RBA's go. -50bp. Booosh. Hit...... Battleship AND Destroyer. Otherwise known as our short Aus bills and long Aud/Cad positions. Holed, but we still have steerage and the main engine is still running, just. Man the pumps. What a bunch of W&^ers.

Aud/Usd is 100pts lower, Aud/Cad is back to its lows of a few days ago, eur/aud is breaking higher (but then we do have euro relief going on too). Rates market moved sharply and is pricing more than 25bp of further cuts combined for the next two meetings.

That RBA rate cut has really focused minds over what's going on out there. There has been a massive positional and mood bias, mostly from US leverage that a) China is heading for a hard landing and that b) Australia's two speed economy and constant deficits leave it highly geared and more and more dependant upon the China dream paying for local excesses. Because of that AUS has been a favourite short since the beginning of Feb, when the China fears really started, as Aus was seen as the vulnerable high beta. So today's RBA cut could be seen as the final justification that those shorts have needed. Toldja so! Particularly from that McCrann man. Uuuurgh.

But the China part of the Aus trade may not be paying off as fast as many had hoped. PMI this morning at a smidge under expected is no calamity and, to us, points to flat to up, rather than down the tubes (before anyone starts, we are NOT of the opinion that the official PMIs are rigged).

Is Aus going to tank from here? TMM still think not and rather than abandoning their AUD/CAD ship they prefer to man the pumps and bail like hell. Unfortunately their Aus bills position has already sunk below the waves.

It's meant to be a holiday today, but TMM haven't had much fun either at work or outside. As the media headlines proclaim "This is the wettest drought on record in the UK". With hosepipe bans still in effect, TMM are waiting to hear back from their local water authority as to whether they are also banned from using them to pump the floods out of their houses.

Elsewhere TMM have permanently switched off the BBC Radio 4 Today program in the mornings and are bearing up to "easy listening" instead. We suppose that with the Leveson enquiry nailing the Murdoch empire and the BBC's natural bias melded with some of the most embarrassingly twisted economic "analysis", we shouldn't be surprised at the minutiae of political issues being dragged out as headline stories. TMM are waiting for the headline news that Tories are guilty of human genocide because it hasn't been proven that they are not and some email is found saying " I'll kill whoever said that" in some ministerial hard drive. BBC - GET A LIFE. Or rather get some journalists who have some understanding of the real world.

We do feel that mankind is being poorly served by politicians who have studied nothing other than politics, being reported upon by journalists who have studied nothing other than journalism. Team Macro Man have suggested before that politicians should only be eligible for election having spent at least 10 years in a "proper job" but we would now like to extend that stipulation to encompass journalists.

For Frack's Sake

noreply@blogger.com (Nemo Incognito) — Wed, 25 Apr 2012 09:12:00 +0000

And relax. BBVA results not the shocker disasternistas were hoping for, the cult of AAPL continues to fleece its disciples and it is looking more as though that was NOT the big one re Europe. TMM can’t help but think this has got a july 2009 feeling about it. We had the QE sugar rush from mar09 to jun09, then the market sold off because no-one believed it. But then the earnings season was good and the market ripped higher, never looking back. OK it may be a bit premature, but with all the noise subsiding and the market blaming the quiet on “waiting for the FOMC” which to be frank no one really cares about, TMM are more inclined to believe that the markets are “shagged out after a long squawk”. Whatever the reason, we will be invoking the “do not short a quiet market” rule and expecting more up drift.

Whilst it is quiet we will have a look at something we believe is about to change the world much more than any Apple iteration – the changing shape of energy supply. TMM would like to start today’s post with an interesting chart showing energy costs per Gigajoule for major fossil fuel sources in the US. White is Power River Basin coal, orange is henry hub gas, yellow is oil and pink is international coal (Newcastle spot).

As you can see, the big story of energy prices going to the moon over the last decade remains very much intact but gas has been doing something very unusual – after spiking hard it has gone into a massive decline and is almost as cheap as powder river basin coal on a per GJ basis. The cause of this is the fracking revolution in gas production which has massively increased the US’ fossil fuel reserves. It is already being keenly felt in power markets where US coal companies are being killed by the increased competitiveness of gas fired power generation as the portion of the day in which it makes sense to burn gas is longer and more profitable, reducing those peak time margins that coal fired power plants make much of their profits from. For coal equities this is hardly news – Cliffs Natural Resources, Alphadyne and Arch Coal have not been feeling the vim and vigor of a resurgent US economy. Similarly the US’ strategic exposure via oil imports to the Middle East and less than friendly regimes like Venezuela is waning judging by the chart below. Crude import percentage from Saudi in white, Canada in orange and Venezuela in yellow (Note the post Libya ramp in Saudi imports – that won’t be around for long).

TMM can’t help but feel that the money for the “war on terror” could have been better spent, but the US appears to have been a classic case of “better lucky than smart” in that regard since they have secured a reduced exposure to middle eastern madness through oil sands. Now, not that oil is mattering as much as it used to – below are vehicle miles travelled in the US in orange, inferred gasoline demand in green and average MPG of sales in white.

Not hard to see what is going on here: a period of high oil prices has pushed consumers into buying much more efficient vehicles and vehicular travel has peaked. Much like any business if unit sales and prices are down revenues are down a lot. TMM are wary of hockey sticks though so we thought we would do the comparison of a new efficient hybrid, say a Prius C and a Corolla. In summary – it’s ugly, and the google docs link is here. You need $2 gasoline to even think twice about not buying the hybrid. In addition, companies like Ford are offering vehicles in gasoline, electric and LPG versions. No points for guessing how gasoline stacks up in the lifetime cost analysis there. Simply put, the vehicle mileage hockey stick is going further, a lot further unless WTI halves. It would be particularly disturbing if people widely moved to plug in electric cars which essentially allow you to do what the power grid does – determine which fuel is cheapest to burn then burn that. In that case you would expect oil and gas to converge on a per GJ basis which would be a catastrophe for WTI.

In summary a few very important things are happening in energy, but particularly so in the US:

Energy prices are falling for gas, with knock on effects for other markets in which it is substitutable. Similarly, vehicle fleets are becoming more efficient and gasoline demand in DM is probably in a structural bear market on that alone. This has major implications for US inflation most of which has been from food and energy in recent years despite motor fuel being only ~5% of CPI basket and heating and utilities being another 5%. It may be the case that even if housing recovers and “rent equivalent cost of ownership” (~40% of the basket) stabilizes that the US has a very benign inflationary environment for structural reasons. Buy all the gold you want, but if people’s gas bills cease to exist or go into a nominal decline then that will take the bite out of a lot of quantitative easing in commodities.
The historic segmentation of the energy markets into transport fuels and utility fuels is starting to blur and is likely to continue to do so. For that reason, the pricing per GJ for each should converge over time. You may not be able to make everyone in the US buy an electric car tomorrow but the ability of WTI to command a big premium over henry hub will weaken over time.
US energy imports are falling fast and will continue to do so as the vehicle fleet turns over. This is going to have major implications for US defense spending – how much does the US care about the Middle East, ex oil? TMM would note that if the straits of Hormuz are closed, China has more to lose from it than the US. In addition, it has major implications for US tax receipts if people buy LPG cars or electric ones. US utilities pay cash taxes in the US, Saudi Aramco does not. The major problem of the US from a macro standpoint, its twin deficits and high debt may be reduced materially by these trends and the historically cheap USD may be the best buy in FX for the next decade.
Make it in America? The US and particularly the Democrats have developed some kind of romantic attachment to manufacturing and politically astute CEOs like Andrew Liveris of Dow have picked up on this theme and have called for the US to have an industrial policy, aka, handouts for corporate along the lines of China. TMM see this for what it is – getting something for nothing and think it is largely unnecessary for most businesses. It is highly unlikely the US is going back to making garments or in any way competing with the scale efficiencies of southern China when it comes to cheap labor, especially as China’s factories increasingly replace labor with capital. Where it can compete however is in areas that are skills or technology intensive (when in doubt, buy out Asia’s best and brightest with grants) and anything that is energy cost intensive. Liveris notes that labor is <12% of COGS at Dow and Energy is 25% or more. TMM think that $2 gas makes a much bigger difference than looser labor laws or tax holidays.

The Downside….

There is another side to all this aside form extolling the virtues or hope of a resurgent America, and that is the effect it will have on those on the long side of the commodities trade. For the likes of the Middle East and Russia TMM have this to say:

Saudi and Russia in particular have developed fiscal arrangements (Saudi’s covered well here) such that their economies “don’t work” at much less than $90 WTI. Russia is not that much better and is more dependent upon gas, something that the European buyers they have held to ransom for so long might not want to buy if they can frack their own as Romania is currently exploring. For that reason TMM are hard pressed to think of currencies they dislike more than the rouble – all the terms of trade frothiness of Australia with a boatload of political risk and a much bigger credit bubble as can be seen below.

Even in the case of Australia all those lazy RBA terms of trade and commodity price projections may go awry if China manages to produce a lot of fracked gas – China SOEs have never been ones to shy away from renegotiating off take of commodities if it suits them though that is likely a late 2010s / early 2020s problem. Some countries have the political wherewithal to take such a crunch in terms of trade (Brazil, Australia) others might not make it and require some institutional change when they can’t deliver their side of the autocracy / milk-and-honey trade.

Of course the real crunch comes against renewables. Whilst cost differentials have been narrowing between traditional fossil fuels and solar and wind,. will the energy addicts be able to resist dirt cheap carbon emitting gas for the benefit of the environment? TMM think not as austerity drives people to short term survivalist individualism rather than long term community spirit though that is arguably in the price these days. The larger shock is that by the time we start running out of gas energy prices might be following solar's quasi Moore's law - which wouldn't hurt any of TMM's power bills.

Dude - where's my current account surplus?

noreply@blogger.com (cpmppi) — Tue, 24 Apr 2012 13:23:00 +0000

Well, today is a very important day for markets, as the largest ~~religion~~ company in the World reports earnings. Despite the strength of the earnings season so far, names have found themselves lower just a couple of days later as profit taking has come in. In the short term, that seems reasonable, but does not detract from the trend that the economy looks pretty good with companies making money - that seems pretty "normal" to TMM. Of course, against that, it seems that everyone TMM speak to expect AAPL to sell off post earnings, regardless of the actual top or bottom lines. Make of that what you will. TMM will most definitely NOT be watching the AAPL release, and will instead be getting pissed down the pub.

Anyway, we digress. In amongst the usual bollox arriving in their inboxes this morning about Europe and concern that a certain Shampoo brand (how do we know the girl in JAWS had dandruff?) was going to portent the end of the world , TMM were asked why, despite Oil prices having rebounded from their recessionary depths, Canada was running a Current Account deficit of close to 3%. Given we're fed up to the eyeballs of anything Europe, we thought we'd have a look.

It's kind of interesting actually, that this particular subject has been brought up given that on that long list of supposedly great macro trades that has so far refused to perform is that old chestnut "Short AUD/CAD". Now please forgive TMM for their snarkiness but, in our opinion, this is one of those trades dreamed up by a group of punters we shall now term as the "Off The Cuff Macro Numpties". This particular group are known for their use of a little knowledge, a few good charts and their favourite hobby "Bubble Hunting", which essentially consists of looking for something that has increased in price by 10-20% and yelling "Bubble!". Oh yes, and telling TMM that we are clueless in the comments section below.

But back to Canada. Looking at the Trade Balance (see chart below), indexed such that Q4 2006 equals 1, it is interesting to note that while post-crisis, both import growth and export growth don't actually look that different, the level of exports fell far more sharply and has not really recovered particularly well. Well, to TMM that exports have not recovered tremendously is not that much of a surprise given that the US recovery (Canada's largest trading partner) has so far been rather tepid. That imports have re-accelerated is perhaps more interesting, particularly in the light of the strength of retail sales in Canada since the recovery began.

Now TMM are unconvinced, as discussed before, by the idea that there exists a housing bubble in either Australia or in the UK. This is primarily because of the balance between housing construction, housing supply and household formation. It is not obvious to TMM that valuations are out of line when the above conditions are either in balance or in deficit (not enough housing supply) when many can be explained by structural falls in interest rates (and interest rate volatility) amongst other things. A full discussion of this is well beyond today's post, but TMM do think that these factors are significant in explain why the US and Spain experienced a spectacular crash in house prices, whereas the UK and Australia (at least so far), have not, despite - well, specifically in the case of the UK rather than Oz - very similar macro outcomes and policy responses.

So why do we bring this up? Because TMM do actually reckon that Canada *may* be a candidate for a housing bubble, given the dramatic run up in house prices, interest rates have arguably been kept too loose post-crisis (understandably so, given the external risks), TMM have received plenty of anecdotes and adverts that evoke déjà vu of 2005 in the US. But most importantly, housing construction has been widespread, it is a big country with not too large a population and housing starts (~215k) have been running above household formation (~170k) for a few years now. TMM haven't looked in enough detail to come to any firm conclusions as to whether Canada's housing boom is a bubble or not, they do reckon that it is different enough from Australia's to matter.

So Canada has clearly had something of a consumption and investment boom. What about Australia? The trade dynamics in Australia look almost the mirror image of Canada's, with imports having recovered to around the pre-crisis, while exports (to China in particular) have roofed it So is this perhaps a case of the real trade *not* actually being a case of long commodity currencies etc, but a case of being long the stuff that people actually want. Because the above evidence suggests that there isn't, y'know, that much demand for Canadian oil and other stuffs.

But that's not the end of the differences. A little observed portion of the Current Account balance is the Current Transfers balance, usually confined to those of us bean-counting remittance flows to Mexico or the Philippines. And it is notable for two similar sized economies that over the past few years that Canada has built up a sizable transfers deficit (white line, chart below) while Australia hasn't (orange line). Now that could mean one of many things, but the most likely explanation is US construction workers having found work in Canada's tight labour market sending their earnings back home.

So given all the above, it would appear to TMM that perhaps the confidence with which punters keep trying to sell AUD/CAD may be misplaced. Because it appears to us that Australia is selling stuff people want, while not experiencing a domestic consumption boom, while Canada appears to be precisely the opposite. Canada also appears a more legitimate prospect (though this is far from certain) for a housing bubble than Australia, and increasingly, migrant labourers are sending their earnings home adding an additional headwind to the currency. Combine that with the popularity of the short, the rather tepid response to the soft CPI print over night, a market now looking for a 50bp RBA rate cut next week (after ~~famous idiot~~ well-followed Aussie Journo McCrann has started predicting it) and a soothsayer "Buy" signal on Friday, and TMM reckon it could be time to squeeze some gonads and scoop up some AUD/CAD.

Is THIS your wave?

noreply@blogger.com (Polemic) — Mon, 23 Apr 2012 09:48:00 +0000

Mood is not good in Camp TMM this morning and it does feel like a camp. Encircled by whatever the politically correct way of referring to Red Indians is these days. For here we sit with a pile of Spanish stocks, our background long equities in general and our view that the world is not about to end and whooping and hollering all around us. There is hardly any point in us going over old points on Europe as Europe (come to that, most views at the moment) has effectively become religious in point of view. We remember all the past cults of markets and it would appear that the last 5 years have programmed a new generation of market participants that the cult of Roubini brings you fame, fortune and credibility. True, TMM themselves could have been classed as the biggest contrarians in 1998 - 2000 mocking the likes of Abby Cohen, and also suffering near depression on the run up to 2008 shouting "can't you see it?" but to TMM this current Cult of the Black Swan is creating a new Mordor where everything is BLACK!

But this disasternista thing is tiring. And we are tired. Roller coasters are fun and the thrill of the big fall is exhilarating to the point of wanting to have another go straight away. But after an hour or so it's uncomfortable and, more boringly, predictable. But with a roller-coaster you do at least get the guaranteed big fall every ride. However perhaps this is more like surfing, with the doomsayers out on their surfboards hanging out at the back waiting to catch the big one. Waiting as the sets roll in, watching the eager young pups jump on rides that just fizzle. If THIS isn't the wave, then just wait .. the big one will be coming along soon.

Is this the big one? It certainly feels like plenty of folks have decided to catch it, as Holland and Hollande (don't they make guns?) on top of a set of weakening PMIs result in what feels like an old fashioned YOURS. One of those YOURS that revolves around speed and momentum (the steepness of the wave) rather than new thought or process. But to TMM this isn't the big one and we will sit it out as we ponder -

1) If this really is the "End of Europe" play, why the heck is eur/usd effectively flat
2) The corporate splurge. Looks like the flood gates are opening on those piles of cash with today's offering being Nestlé's purchase of Pfizer's baby food - for cash.
3) There is virtually no difference between the fiscal policies of Sarkozy and Hollande in terms of budgetary consolidation.
4) Isolation of the German view in Europe is, we would argue, a positive given that the market has been calling bluff on the "Austerity Only" policy prescription that has largely failed in the periphery so far. You can add to this Holland's move to reject Buba orthodoxy and Merkel's likely election loss to the SPD next year.

The compression and isolation of Germany is of course the end-game, when it comes. However it would appear that for them to acknowledge that they need to share the burden, they first need to acknowledge that they are also as guilty as the Greeks. Culturally that is not there. Which reminds us of an incident we experienced when skiing in Italy this year. The Italian waiter gave our order to the guy behind in the queue by mistake. The guy knew it was in error and yet he said nothing. When we told him he was jumping the queue he told us that it was not his fault - the Italian waiter was stupid. We asked if he was German and he replied asking why would that be relevant - in a VERY German accent.

This move does feel forced and it isn't for us, except in commodities and commodities-driven EM. TMM has a sneaky suspicion that those catching this wave are a little too clever for their own good and may be using one of these.

Spanish Kevlar Gloves

noreply@blogger.com (Polemic) — Thu, 19 Apr 2012 14:26:00 +0000

First TMM would like to thank the wonderful folks of Cyprus for their hospitality, fantastic go-karting facilities, interesting beverages (we imagine that a few local producers are retiring to Monaco after our custom) and their UK weather, imported especially to make us feel at home. Special Cyprus weather. We will be back - or at least our teenage children probably will be. So now we are back on planet "caffeine free" let's look at what's been going on.

Before our departure to overcast climes last week, we mentioned the 2 wobbles and a hope in the triumvirate of global economics so it's worth seeing how things have changed. The most obvious thing that greets us is that China is no longer on the front page of "Bear Weekly". Now this, of course, suits TMM who have been long of H-Shares for the past 3 weeks and we have no plans to change that position. The US picture, post the NFPs, had appeared to have also stabilised and despite a shake down in AAPL things are noisy but flattish, having said that, the Philly Fed and Housing Data is not helpful.

But China and the US appear to have been shoulder barged out of the way by Spain. Poor Spain, doing an impression of a Wildebeest at a crocodiles' pool party, with even Argentina tearing off a limb whilst it's underwater. That move by Argentina should make for some interesting politics. Perhaps the UK should hire Repsol to explore for reserves off the Falklands. That could even end up with the Royal Navy and the Spanish Armada on the same side.

But back to Spain, or now Europe. because after the sort of OK-ish Spanish auctions we thought there would be two options - Buy some carry and wait for the next event date for there is nothing that kills a bear more than nothing happening OR decide that whatever happens, this is just can kicking and so refer back to the holy bible of Euro2010/11 for guidance "For was it not writ that should the Spanish yields hit 6% we should trash Italian stocks, start rumours of French downgrades and argue that the German population will not support the rescue of Spain"?

TMM do prefer scenario 1. What do Europe sellers expect to happen? To TMM it would appear that the only scenario that supports selling right now is one where Spain crashes, doesn't receive assistance, defaults and the Euro and then Europe break up. Now call us picky but though that indeed is one potential outcome there are a lot of other scenarios and most of them involve some internal resolve, even if it does involve printing your amount of money. Elections may change the leaders of some countries but as the UK Con/Lib coalition is finding out, they are but the tip of the iceberg of the machine that is government. There is enough mass below the waterline that knows where its true interests lie to stymie any threats to them. Yes Minister indeed.

Having piled back into equities last week the current mood should be considered as red flags to us and we really ought to run with the pack, chop the longs, swing short and whip up the doom. Instead though TMM have decided to do the reverse and have broken the glass on the cabinet containing their Kevlar Gloves and bought some Spanish stocks of international appearance ( braced for comments). Hold on tight !!

Cyprus Special

noreply@blogger.com (Polemic) — Sat, 14 Apr 2012 14:41:00 +0000

TMM are today feeling old. Yesterday was a struggle. Despite a 30 minute power-nap before dinner they felt "urrgh" throughout the meze-athon in a Cypriot restaurant decorated in a melange of authentic style and black marker-pen client graffiti. But then this is day 2 into a tradition that stretches far back in history. As Socrates famously wrote, "Many hours have I sat in solice, drinking beach buckets of luminous green fluids and shot glasses of equally vivid pink liquours, contemplating the origin of this maddness for I am wracked as to the primordance of the concepts of marriage or those of the stag party"

This place goes by the name of Ayia Napa. It sits upon ancient ley-lines that twist the very fabric of space and time, for was it not 9pm a fleeting moment ago, when we wanted to go to bed, and yet now it's 3.30am and sorry I can't hear you? And that ley-line twisting continues into the minds of the club designers (how do you get that full size pirate ship to stay on the front of your shop?) and twists our minds to even cope with being here.

Of course TMM could say that they are here to celebrate Greek Orthodox Easter, but that would be even more of a lie than "yes, your club looks great and wow how many bottles of sambuca for 10 Euro? I'll go and get my 15 friends and be back in 15 mins.. I promise" but not quite as big a lie as the swarthy fellow on the door with "Don't worry, I do you 'special' price".

TMM have discovered if you order anything in Cyprus, say x, you get "special Cypriot x". Special, made in mountain/village/family goat by uncle/grandfather/family goat. And it's very special indeed. But basically Cypriot x is similar to normal x and only differs in being more expensive and... shite.

For example. White wine.. "This is special Cypriot wine, it's like a sauvignon blanc....". but is not and smells of BO. The red? "Yes we have Cypriot red, very special, it is like a cabernet" but it is not and it tastes of musk ox. Very special.

What's this? "This is special liquour, we call it (sounds like "ghalachosinosisisos") it is made using grapes and we take them and turn them into special drink, come come I bring for all. It is made in the mountains using old tradition that no one can remember, to make special taste, that taste like brown sticky fluid in the bottom of food waste recycling bucket after 5 week bin-man strike.. Eees very special. We serve it frozen so you can taste it a little less.. very special"

Last night was "Opening night at Bedrock" which was much like a cross between a BBC Radio One roadshow, Butlins and a McDonalds - if McDonalds were to make McShots, McJaegerbombs and McWhats-this-one-i dunno-just-drink-its.

"And come, I show you, my club full of special pretty friends, yes very pretty, they is made using recessive genes from Northern Europe that would never normally see the light of day, notice how none of them have any dorsal line symmetry? And, ah yes sir, you cannot work out where their dorsal line run? Too many kebabs perhaps.. "

Taxis are special too. They are all stretch limos and come with a special fixed price which switches to a special dynamic price that goes up between departure and arrival. "Because it is special Cyprus price" Ahh, we see! And there we were thinking it was because we are getting special Cyprus driving, where which way you go around roundabouts depends on the shortest route to your exit.. "no ees ok, it not high season, not many cars"

Well at 3.30am after a special bar bill, (made using special Cyprus maths taught to Cypriot waiters from the age of 2) and a special unnecessary hot dog.. (ees special as it no easy to make a food product out of crude oil, you like? Perhaps your friend ..he likes?). We arrived back to the hotel for some special sleep. It's like normal sleep only much much shorter and one wakes to find one's head nailed to the pillow, a dead hedgehog in the mouth and a gallon of battery acid in the digestive system. "Eees special Cyprus sleep, you like?"

So what does today bring? TMM are writing this from the special 2 hour bus trip to the special wine tasting in special mountains wondering if they can squeeze in a special nap, despite Swedish House Mafia's "One" rocking everyone around us, before we all head off for our big special night out in the special clubs of Limasol.

TMM are slightly concerned that Day 3 could be a bit special.

Two Wobbles and a Hope

noreply@blogger.com (Polemic) — Wed, 11 Apr 2012 15:16:00 +0000

TMM are on holiday at the moment but watching with interest and that interest has picked up to the point that they have been lifting phones and doing trades.

There has been debate and difference amongst the team as longer term macro positions of some were being parried by shorter term positional views of others. But today once again TMM are aligned because the dipstas amongst us have decided that this dip is enough and have covered any remaining short term shorts and got back in, properly committing to longs in equities again.

Why? Well to those playing and whipping up the downside there is a perfect storm brewing as the global triumvirate China, Europe and the US each experience their own negatives [a quick media dig here while we are at it, how come up-moves in equity markets are always quoted in "points" yet down moves measured in "Billions of dollars wiped off the value of"?] But to Team Macro Man it feels rather than being a perfect storm this is 2 wobbles and a hope.

Wobble 1 - We continue to feel that Europe 2012 is NOT Europe 2011. The type of Price is News bluster and "haven't seen these levels since the last time" lines flying around the chat screens was notable in its vacuousness of new news other than the price has moved because the price has moved. We agree that the austerity vs. growth, debt/GDP equation is seeing GDP killed by austerity but we do not see systemic risk to Europe as a whole. This time around, basis and funding markets have not blown out, only widening to a token degree. Simply put, whether or not one agrees that the 3yr LTRO solves all Europe's problems or not, it would be churlish to deny that it has drastically improved bank funding conditions and, absent of forced bank deleveraging, it is kind of hard to expect Europe to "go systemic" once more. So though this is a bigger story further down the line, despite the seasonality of April Euro kickings, we don't think now is the right time.

Wobble 2 - US NFPs One number does not a trend a trend make, and especially one with such a large standard deviation. What can be said, however, is that considering a smoother three month average, that the labour market is a bit less vigorous than previously thought but certainly showing improvement - coincidently, agreeing with Chairman Bernanke. While this certainly does not imply that QE3 is back on the table, it does - arguably - put markets in something of a sweet spot provided that the data does not materially worsen: data consistent with 2% or higher growth is likely to be positive for risk assets, while a move above 3% would risk unanchoring the bond market. To scare TMM, ISM would need to head back to about 51, something that is unlikely when the orders/inventories gap is still supportive of the inventory cycle and when the inventory/sales ratio has not yet begun to rise. When this happened in May 2010 and 2011 it was time to sell.

The Hope - China again. We have laid out our thoughts on China over the past few weeks to a fair amount of ridicule and chastisement but we will stick by our guns. The latest Bo Xi news is not a concern of ours, and if anything the apparent connection to the death of a British expat arguably shows that China is becoming less corrupt in its dealings: while innocent until proven guilty, this is clearly better than being swept under the carpet. We also don't feel that the move to allow CNH capital to move onshore is a sign of desperation, but more one of efficient use of funds - it is simply another step along the line to full capital account convertibility. The Trade data and its slowdown in imports does not mean a collapse of internal economy either. Confusion over data on China reigns and as FTAlphaville has observed, can be used to support any argument but we feel we have done our own homework in polishing the fog from our data specs and are content with our interpretation and would encourage readers to go and look at the regional breakdown of both imports and exports (hint: it's Europe, not Oz/SA etc). China is not crashing.

So with our concerns so out of alignment with the noise we hear around us, we are now united in our hope for the markets to head on back northward and given the positioning and hope behind this dip occurring any discernable base and rally is going to be jumped on hard as no one wants to miss the train again.

We will be back next week.

Easter Poem.

noreply@blogger.com (Polemic) — Fri, 06 Apr 2012 09:14:00 +0000

Easter comes as every year
And with it brings a dose of cheer
For the bears who look again
To Eurowoes, this time from Spain.

For when we note their yields rise
It's time to sell in decent size
The other debt that Europe calls
"Defendable", as it always falls.

But slice the links
And as Spain sinks
She shall not drag
The others down

L T R O for all its flaws
Has shielded them from big bears claws
So though great profit is our aim
This time be warned - It ain't the same.

And far, far east where junks are kept
The "junk" you sold has now all leapt
As markets bounce as data cry
"Growth is back", yet you deny.

It must be false! They made it up!
Coal sales are down in Buggerup!
For I know best, as I sit here
Eight thousand miles from the land I fear.

So now the mere is crowded out
With hides of hunters who all shout
"Mine's the Swan! The blackest one!
That I will down with my short gun".

But normality is not like that
For most its creep and crawl, or flat.
A drift, no thrills, just gentle grind
Where quick return is hard to find.

So cease thy bets on tails and jump
Back to the fat that's in the hump.
One day we'll die, yet doesn't mean
In coffins waiting we'll be seen.

Stopfest City Limits

noreply@blogger.com (Polemic) — Thu, 05 Apr 2012 11:26:00 +0000

What's the news ? THE PRICE IS NEWS!!

This is good old fashioned psychology and some of Team Macro Man really enjoy these markets. It's when opportunities open up due to timing issues and people having to do things through money management decisions rather than bigger fundamentals. Otherwise known as a STOPFEST. As we mentioned yesterday the preponderance of lines on charts all converging in a holiday week is all too much to ignore and is far too tempting not to run at considering the stops that lurk beneath.

This method of unzipping a market reminds TMM of an old tactic they used to use to arrange boys skiing holidays. As ever the mission was to unzip the invitee's from their partners who may either want to come themselves or resent being left home alone. The method went like this - Onboard the single males first and then approach the weakest linked couples to easily get the buy-in of the guys. Next approach the stickier relationships and when asked by the partner who was going list the other pre-assigned men (normally the most laddish). Realising no other girlfriends were going the partner would relent. Save the toughest couples for last and insist that BOTH are invited and you really really wanted them both to come. The girlfriend/wife would ask who was going (by now 14 blokes) and realise she would hate it and would insist that her partner went alone and apologise with some irrelevant excuse for why they couldn't come too. Job Done.

So it appears today that the markets are employing similar tactics to unzip positions via stop losses. Starting with the weakest and using the building momentum to finally tackle the toughest. This started as an FOMC inspired anti-QE trade. The moves from that sucked in European Peripherals which sucked in Spanish background, which had always been there but was being ignored until prices started to unravel. This started to unzip equities which have now broached some key trend lines. These trend line breaks have seen acceleration which has further helped USD up and Euro down. Meanwhile, European bond markets pick up momentum to the point where, combined with all the above, there is enough momentum to have a crack at breaking the most tough of pairs. EURCHF. Yes the stopfest has now managed to crack the floor in the house of SNB. Or has it?

It would appear that once again those to make the easiest buck in non-exchange traded FX will be the lawyers as debate is already raging as to the validity of prices sub 1.2000 with respect to barriers and stop losses. Credit issues in machines will always mean highs and lows are debated until someone "decides". TMM are very glad they are not sitting in the middle of one of those disputes but, with resolve tested after that sneak attack we think the SNB will be out sticking fingers in the dykes to an extent that CHF is our favoured short against anything we want to buy. You can't do a sneak attack twice.

So we are left here hanging. Holiday ahead, stops driven, is this really the environment to load up new risk off positions? Not in our eyes. NFPs falling on Good Friday is bad enough without all this noise on top of it. So far Price Is News. We will wait for next week for real news to come back to the fore before we take action. And anyway, who wants to get stressed when on Holiday?

TMM wish you a happy holiday and may the Easter Bunny bring you far too much chocolate...

Choose your Poison

noreply@blogger.com (Polemic) — Wed, 04 Apr 2012 10:40:00 +0000

Haven't we had one of these before? FOMC doesn't hint at QE3 so we trash everything as there will be no more free money? But no more free money because free money is not needed is not a reason to sell everything. Bonds - Ok that makes sense, but equities? We are pretty sure that QE3 WOULD be back if needed but if you are beating up the QE trade then you buy usds, sell bonds and sell gold. But do you REALLY trash equities? US markets closed pretty stable and it had only been Asia pushing things lower but now Europe is trying its best to have a wobble "all by its own self " as if the FOMC wasn't enough, with the reason morphing into a Spanish event.

But what of this Spanish event. Is it real? Not yet in our eyes. Or is it just the soft underbelly of Europe to be next jabbed at by the Bond Vigilantes? Perhaps. Or is it just the cat that is being kicked, the kicker having been irked by lack of performance in short US and China growth trades? Perhaps.

But we do feel that leverage and short term specs are desperate for risk to sell off for a multitude of reasons and the scepticism that was present at the beginning of the year is still with us. The key point we believe most important to those players with strong hands (real money) is that the growth backdrop is good and improving in 2 out of 3 of the world's growth engines. The arguments for risk to sell off seem centred around theses that are either plain wrong in our eyes (china hard landing), or are not yet systemic - take your pick from the list of Eurowoes that the current Spain move is exemplifying and are as yet unproven (April/may seasonal data rollover). We also hear arguments that the rally has gone on "too long" (SPX did 55pc off its lows in 2009 with no more than a 7pc correction) and hear those arguing that one stock cannot make a market (AAPL). The trouble with this view is that for every potential risk that bears come up with, we can come up with a positive. So our "Big picture" remains that this still looks like a Wall of Worry. Add to that, positions are still not large in the medium term space i.e. real money and long/short equity hedge funds look as though they are running only 35pc net long vs 60-65pc in every 5%+ correction we have had since 2009.

Our shorter term worry is that prices are today getting smaller and charts are being waved showing important lines. And we know from experience that lines on charts are the troll bridges of markets under which hide large ugly stops that will gobble up little bulls no matter how cheery their long term views.

Bear Food With Chinese Seasoning

noreply@blogger.com (Polemic) — Mon, 02 Apr 2012 11:36:00 +0000

TMM were somewhat chuffed to see their data mining and manipulation last week pretty much get the China PMI spot on. But what is the point of getting the number right if the market doesn't respond as expected? We know that China is still on holiday and so hasn't had a chance to act but the fade in Asian hours from opening highs in nearly everything "risk" is somewhat frustrating. Why does everything have to be soooo HARD? Can't we just for once have a "there's-a-good-figure-market-goes-higher" event? This morning though, trying to suggest that the data is good appears to be as difficult as arguing the origins of fossils with a creationist.

The heart of this morning's scepticism with respect to the NBS PMI centres around that old chestnut, seasonality. The trouble with this argument is that it's not exactly as if the realisation that many data series exhibit seasonality occurred suddenly overnight. Indeed, one would expect that expectations for the number embedded such seasonal adjustments, thus expecting on a seasonally adjusted basis that activity *fell*. This clearly has turned out not to be the case. Secondly, as TMM pointed out in their piece last week, there is a good amount of evidence that since 2005, the seasonal factors have been dynamic. Specifically, the 2005-2007 period appears optically to be very seasonal and the 2010-2012 period appears to not be that seasonal, if anything looking a lot like the movements in the PMIs from the rest of world. Which brings us to the 2008-9 period which is known to have caused echo effects in the X-12 seasonal adjustment process elsewhere. Indeed, the very large moves in those years mean that simply comparing the average March vs. February change is somewhat naive and biased. Next, the divergence between the HSBC and NBS PMIs, which can arguably be accounted for by considering the changing composition of Chinese growth becoming more orientated to inland cities over the past year or so.

While this is rather dry and geeky, TMM have become utterly fed up with the Mickey Mouse laziness exhibited by both punters, economists and the media as far as the analysis of the Chinese data goes. TMM's analysis that attempts to take note of the above issues by using a dynamic seasonal adjustment approach, suggests that activity moved higher by around 0.7ppts. Bears: just get over it.

But whatever TMM think or say, a mass escape of bears at the bear house in the national bear institute, Ursine city, look less bearish than the commentaries landing on their desks with respect to China this morning. But the price falls we are seeing so far are more associated to European peripherals and especially the European banks rather than Asia. Do we therefore suggest that the China PMI has been put on the backburner and a new bear toy box opened with respect to European PMIs and slowdown? Very Seasonal that. April - Don't we historically start taking a pop at Europe during April?

As TMM mentioned last week there is a regional flavour as to opinion on China so perhaps we just need to get through a complete trading day cycle before we get a true representation of reaction, but TMM are going to stand by their guns as far as China goes and if we are going to start seeing some spurious euro trashing we will play this as a regional cross trade rather than a global play. But for now .. hold fast boys.